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As companies grow and expand, third-party logistics (3PL) is an option that more of our clients are evaluating. To be objective, 95% of our clients have internal call center and fulfillment and they are pleased with the results.
This is a case study of how one client made its decision to implement 3PL rather than manage its own operation. It is a small apparel company with 125,000 orders with 50%+ ecommerce orders. Product offering is 24,000 active SKUs and 75,000 calls annually. They needed to replace an outdated, ineffective, non-PCI/DSS compliant order management system. They had no space for expansion. “People were sitting on top of each other” and the company has a huge assortment of core product to offer.
They were new to benchmarking and did not know their TOTAL cost per order. We analyzed the internal fulfillment costs and found that it was $14.00 per order without shipping costs or packing material costs. To arrive at this we took the TOTAL annual costs for the call center and fulfillment as shown below:
For the contact center expenses included Direct and indirect labor; benefits, recruiting, vacation pay, payroll taxes, overtime, etc.; occupancy, communications, and depreciation, amortization/ lease costs for equipment and software.
For the backend fulfillment expenses included all the departments involved in the 4-walls functions of warehousing and order processing and returns. These costs include direct and indirect labor; hiring, benefits and payroll taxes, vacation pay and overtime; occupancy (equipment, heat, light and space); packaging supplies; and IT expenses for support to contact center and fulfillment operations.
The reason the internal cost per order was high is that the fixed expenses are high, such as managers and their benefits, occupancy, and IT expenses, etc. The business has two peak seasons per year. There are 26 “valley” weeks per year where the cost per order was very high, and the remaining weeks where the cost per order was efficient.
After surveying the client’s business, we developed a Request For Proposal and sent it to five 3PL companies that handled apparel. ln contrast the TOTAL 3PL call center and back end fulfillment initial, un-negotiated bids were between $5.98 and $9.01 per order. Additionally, the client realized a 10% decrease in outbound shipping cost by using the 3PL volumes with its carriers. The final pricing for three 3PLs was between $8.00 and $9.01 without shipping and packing material costs. This is very competitive pricing for the low volume of orders.
Some service level metrics that were part of the 3 year agreement included:
· 4.5 minutes average call
· Call abandonment rate of less than 3%,
· Online interface to the website and servicing web customer inquiries,
· 24 hour order shipping for in stock product,
· 2 day processing of returns and credits/refunds to the customer
· 24 hour stock put away
· $25 per hour fee for receiving, special projects in call center and fulfillment
· $125 per hour for IT special requests outside standard services and reporting
The business was implemented in 120 days.
With larger businesses it is often more difficult to show major expense savings. However, there are other reasons for considering outsourcing. These include avoidance of IT or telephone system upgrade costs, not taking on more space for fulfillment center expansion, ability to serve customers on an opposite coast, leveling peak seasons of the year and most importantly wanting to concentrate all management efforts on marketing and merchandising.
Curt Barry is president of F. Curtis Barry & Company.